Canadians are paying off mortgages quickly — so is Ottawa’s crackdown really necessary?

Mortgages: Canadians paying down ahead of time

Canadians end up paying off their mortgages in about two-thirds of the time originally intended, according to a new survey which questions whether Ottawa’s crackdown on the real estate market is needed.

The Canadian Association of Accredited Mortgage Professionals predicts Toronto faces an especially big slowdown, with construction to drop off more than 50%

A report by the Canadian Association of Accredited Mortgage Professionals released Wednesday paints us as a very conservative lot not in need of increased government regulation.

The group notes of the mortgages paid off in 2010-2013, the original amortization length was on average 17.9 years but ended up with an actual amortization length of 11.7 years.

Despite the fact Canadians pay off their mortgages quickly, the federal government has continually cracked down on amortization of insured mortgages it backs. The length of amortizations — a longer amortization lowers monthly payments and allows consumers to qualify for larger mortgages at the expense of paying more interest — has been dropped from a high of 40 years to the present 25 years.

Consumers may have gotten the message. Amortization lengths have shrunk since Ottawa started dropping the maximum length. From 2005-2009, mortgages paid off during the period had an average original amortization lengths of 19.9 years compared with an average actual amortization length of 12.8 years.

Now CAAMP is arguing that changes to government rules have actually gone too far and have resulted in a 15% decline in new home construction this year from highs reached in 2011 with a further 25% to 30% predicted by 2015, which would cost 150,000 jobs.

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“We need a balance, we are moving out of balance and that’s what these numbers are showing,” said Jim Murphy, chief executive of CAAMP. “We’re now in situation where we have had eight or nine months of data. A lot of officials felt the market would come back better than it has.”

“[Ottawa] is making an argument they want the market to slow but we are seeing significant slowing on resale and the new side although not yet on prices,” said Mr. Murphy.

CAAMP is calling for the government to ease the rules for first time home buyers. Under the group’s plan, first-time buyers would get to amortize over 30 years as long as they could actually qualify for 25 years.

“We are concerned about the effect of all of this on first-time home buyers,” said Mr. Murphy, adding his group would like to see an increase in the tax credit for new homeowners and an increase in how much can be taken out of an RRSP to purchase an initial home. “It’s not just one thing, all the changes have been cumulative.”

Ben Rabidoux, a Canadian analyst for California-based Hanson Advisors, a market research firm whose clients are institutional investors, said the government still has to be concerned because of the record household debt.

“You have record debt at a time of record low rates so there is no question it sets you up for a shock,” said Mr. Rabidoux, who doesn’t disagree with CAAMP that the new rules have cost jobs. “I still think they are right to tap on brakes. There will be bleed out on the economy. You either bleed it out now and go through a weak period of economic growth or keep going until there is a crisis.”

Will Dunning, chief economist for CAAMP, acknowledged there may be other factors at play in our lowered amortization lengths. “What we have been hearing is a lot of people took longer amortizations even though they could have qualified for 30 years because they wanted a better cash flow situation. But as they get a chance, they pay [the mortgage] off more quickly.”

Even first-time buyers plan to dig deep to pay off their mortgages early. Mr. Dunning said from 2010-2012, first-time buyers who took an extended amortization had a contract with an average amortization of 31.7 years but plan to pay it off in 25.1 years. The study is based on data compiled by Maritz Research Canada of 2,000 Canadian consumers in April 2013.

That survey came on the same day as a Bank of Montreal report that suggested 48% of Canadians intend to buy a property in the next five years, almost unchanged from 2012 and a sign of the resiliency of the market, according to the bank.

“The relative strength of the Canadian housing market continues to bolster homeowners’ confidence, while improving affordability across all regions reflects that Canadians are making responsible choices when it comes to financing a home,” said Martin Nel, vice-president of lending and investments at Bank of Montreal.

Fixed mortgage rates have a lot to do with affordability. Even with the banks abandoning their public advertising of a five-year rates below 3%, mortgage brokers are still offering deals as low as 2.7% for that term and banks are advertising four-year terms for rates as low as 2.99%. The CAAMP survey found 85% of purchasers in 2012-2013 opted for a fixed rate product.

Homeowners also seem to be pricing in moderate expectations for where they think the market is going. The BMO survey found on average, homeowners expect a 2.2% increase in prices over the next 12 months.

Potential buyers are being wooed in some markets like Vancouver by the drop in prices but the bank says its survey shows a modest increase would not dissuade many. Nationally, intentions to buy would only drop four percentage points if prices rise 5%.

The survey was based on online interviews of 1008 Canadians 18 years and over, and conducted between Feb. 17-21. It is considered accurate within 3.1 percentage points, 19 times out of 20.

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